Massive Calif. Deficit Sets Up Budget BattleCalifornia is facing a massive $16-billion budget deficit. To fix the problem, Gov. Arnold Schwarzenegger has proposed across-the-board budget cuts. But Democrats in the state Legislature are unlikely to go along with his plan.

With more now on how the housing bust is taking its toll on state budgets. States rely heavily on property and sales tax revenue, and the real estate slump has cut into both, big time. At least 25 states are facing budget shortfalls, totaling more than $39 billion. That's according to the Center on Budget and Policy Priorities.

Today, we're going to hear about three of those states - Kentucky, Illinois and the most populous state in the country, California, which is facing a $16 billion budget gap.

We start with John Myers of member station KQED. He's in Sacramento.

JOHN MYERS: For the past few years, California dreaming has been full of nightmares over the state's budget. The budget nightmares are rooted in long-term problems like the mismatch between modest growth in revenues and the programs approved by voters. But when the bottom fell out of California's real estate market, things got worst. And even though lawmakers have solved the state's immediate problems, they still are some $8 billion in the hole.

That somber reality has left the eternally optimistic Arnold Schwarzenegger preaching tough love. In an event last week in Riverside County, just east of Los Angeles, the governor defended his most controversial plan, a one-size-fits-all spending cut.

Governor ARNOLD SCHWARZENEGGER (Republican, California): We recommended to make 10 percent cuts across the board, so we don't pick and choose what is our favorite and what is a Republican program and what is a Democratic program. We felt that we shouldn't get into that fight. We should just cut 10 percent across the board.

MYERS: But that seemingly agnostic approach has majority Democrats in the California legislature threatening an all-out war. They want an approach that prioritizes which state services matter most. And tops on their list — protecting public schools, which have already sent out pink slips to thousands of teachers. And Democrats say there's no way around the obvious.

MYERS: Don Perata, president pro tempore of the State Senate, is threatening to keep the budget-fight going, long passed the beginning of California's fiscal year in July.

Mr. PERATA: We're going to be here as long as we have to be, until we have a budget that gives education the priority it deserves.

MYERS: Opposition to tax increases has been the signature issue of Arnold Schwarzenegger's political career. But this year, he's hinted, he may agree to a repeal of some $2 billion in tax credits to help balance the budget. That, however, would require at least some support from Republicans in the legislature. And the only thing they hate more than the Republican governor, who many see as too liberal, are new taxes.

Still Arnold Schwarzenegger's charm is legendary. But so far, it's failed to bridge the bitter ideological divide that exists inside the state capital. And that is the problem that has kept California reeling from one financial crisis to the next.

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